Budgeting: The 50-20-30 Rule

If you are like me, then you hate it every second you need to spend adding your income and expenses in that dreaded budgeting app, making calculations and predictions.

While I always advice people to try and track their income / expenses as thoroughly as possible, keeping tabs on 20-30 separate categories and subcategories, tens or hundreds of small receipts and all kinds of small credit card charges can send one to the loony bin.

What if, instead of wasting tens of billable hours every month, you could minimize this effort and still get the best out of it?

Even my late grandmother, God rest her soul, was a specialist in this personal finance tactic, although she did it naturally, without consulting finance blogs. She just found this method on her own and put it to great work.

I also mentioned a budget that’s simpler, with fewer categories to manage in our article ‘How to budget like a pro‘. Let’s take this further now and build a budget on the 50-20-30 rule.

The numbers are not set in stone, you can tweak a little, but let’s start from here and see where it gets us.

Budget 50% of your income for the living essentials

What does fall into this category?

Well, all the expenses you need to make, in order to live. Your housing expenses (rent or mortgage), groceries, utility bills and transportation.

If you have kids, include their costs here, since you need to cover for these expenses as well.

Insurance and pension plans are also included, you need to take care of your health and also start planning for retirement. Some like to move the retirement savings into the savings section of this 3 category budget, but I’d like to keep them here, as I consider this to be an ‘essential’.

The good thing about a percentage based budget is that it still allows for a lot of wiggle room: you can pay more on rent or mortgage, while cutting costs with transportation. Or spend more on groceries, but rent cheaper.

Set aside 20% of your income to savings

Whatever you do, from the moment you start earning money, get into the habit of saving.

It means to be debt free for longer, get better deals on your mortgage (with a higher down payment for instance), fend off any bad luck (car accidents, health issues that get costly etc).

Saving money should always be a priority for you, since it allows you to reach your goals faster and be protected if anything bad happens to you and your family.

Keep 30% of your income for your personal use

This is what makes life enjoyable: traveling, gym memberships, shopping sprees, eating out.

Just like with losing weight, if your lifestyle is too strict and your ‘diet’ doesn’t allow for any enjoyment, you won’t be able to keep it for longer than few weeks or months. Afterwards you’ll get back to your old spendy self, not keeping a budget and splurging on useless junk.

By keeping some personal enjoyment in your financial ‘diet’, you can still fell great about saving money, budgeting and being so financially responsible, without making it sound like an effort.

You’ll tell me ‘30% is too much to spend for myself, I’d rather save more money‘ for instance. Or maybe you’d like to give the living essentials budget category a bigger chunk from your income.

Let me tell you that I personally use maybe 5-10% of my income for myself. This includes our travel plans, since otherwise my percentage would be almost invisible.

Just like in my case, your budgeting percentages might be different. Maybe you have 60-20-20, or 40-50-10 or anything that works for your family and self.

Whatever proportions you choose, make sure you can cover for your living costs, save enough money for rainy days and retirement, while also funding some of those things that make you happy.